UWMC (United Wholesale Mortgage) is the biggest mortgage brokerage firm in the U.S. and this week has been a doozy for them! I started writing this article on Thursday, which is when the stock was down by 20% for the week. At first glance, the downward red chart was really the only indicator that you needed to make the decision to avoid this stock. And I wouldn’t blame you for making that decision! However, I have added to UWMC aggressively on Wednesday and Thursday and boy did it pay off! UWMC is now my second biggest position and it is my most speculative. This article is going to review the company, the recent headlines that have caused the caused the huge downside and subsequent turn around, and the reasoning behind my bullishness.
What is UWMC?
Back in January of this year, United Wholesale Mortgage went public via the largest special acquisition company (SPAC) deal ever. The SPAC that they went public through was Gores Holdings IV and was valued at $16 billion. A SPAC is a company that has no commercial operations, it is formed strictly to raise capital through an initial public offering of stock to the stock market which it then uses to fund an acquisition/merger with an existing target company. UWMC went public through the Gores Holdings IV SPAC, hit a high of $13.13 and has since dropped to 11/18’s current price of $5.63. For the year, UWMC is down 35%.
As I said before, UWMC is the biggest mortgage brokerage firm in the U.S., but they have a different business model than their competitors. Most mortgage originators are retail lenders, they find their own borrowers, put together the paperwork for the loan, fund it, and then either sell off the mortgage or hold it on their books. That’s the typical workflow. UWMC deals with mortgage brokers who find the borrower and then pass on the partially completed loan to UWMC who completes assembling and funding the mortgage. So, most retail lender’s customers are the lenders whereas UWMC’s customers are the mortgage brokers.
It sounds like this makes UWMC a middleman who takes a cut of the broker’s profits. Middlemen are always better when they are cut out of the business model, right? In most cases, yes, but in this case, UWMC has done a terrific job of strategically placing themselves in the middle of the loan originating process. Think about it this way. A typical homeowner will probably only ever do a couple of mortgages in their life. A mortgage broker, whose job is to source these loans, will do dozens a month! UWMC’s business is to service the brokers, not the individual borrowers. They bridge a disconnect between the two which causes them to have greater access to originating a HUGE volume of loans for the brokers that go through UWMC.
UWMC has invested heavily into their internal technologies. Their proprietary technology platform and emphasis on client services results in a faster, easier, and cheaper mortgage process. They have Blink+ which makes online mortgage applications very easy and secure, EASE Docs 2.0 which generates mortgage origination packages with the click of a button, UClose 2.0 which virtually eliminates the need for a closer by making closing faster and easier, and Client Connect which helps brokers manage client relationships to gain repeat business. All these technologies enable UWMC to close 1 out of every 3 purchase loans generated by mortgage brokers, which is 1 out of every 20 loans nationwide.
Since going public, UWMC has not fared so well, and I think part of that is due to their float. Float refers to the number of shares that are publicly available for trading. UWMC’s float is small and that is a potential problem for any stock. If a stock is mostly held by insiders or institutions, meaning there aren’t many stocks available for trading on the markets, that makes it possible for large players to buy/sell a large portion of the float and thus push stock prices in one way or the other. A good float prevents that from happening which allows the market to accurately evaluate the value of a company via its stock price.
To give you another example of how important float is, all of the major stock indexes have requirements for the float of the stocks that they select for their index. The S&P 500 requires that the stocks in their index maintain at least 50% of its stock “floating” on stock exchanges. Logically, it makes sense. A company that is 60% owned by its founder, for example, is arguably more “private” than “public” from an ownership perspective, given that only 40% of shares are in the hands of the investing public.
UWMC has a float of 94 million shares. To put that into perspective, Microsoft (MSFT) has 7.4 billion shares available for trading. It would take a lot of money to manipulate the price of stock that has 7.4 shares, but for a stock that has just under 94 million shares it is a lot easier. In addition to that, roughly 90% of all UWMC stock is held by the CEOs private holding company called SFS Holding. If there are 94 million shares on the market, and the other 93% are owned privately by SFS, then that means there is roughly 1 billion shares of UWMC in existence. Such a small portion of the stock is available on the market, making UWMC’s float quite the issue.
UWMC’s Secondary Offering
If UWMC wants to become a stock popular to long term buy and hold investors, then they need to add to the float so that more people can buy in without needing to worry about unnecessary volatility.
As of Wednesday, UWMC had announced that the CEO Mat Ishbia and his family would slightly reduce their ownership in an attempt to try and make the stock more attractive to long term investors. They were going to sell 50 million Class A common stocks. This would be 53% increase to the current float. This is a huge step in the right direction.
However, the market did not seem to think so. Following the announcement of the secondary offering, the stock dropped by 20%! This was a huge overreaction. Investors seemed to think that this offering was going to dilute the value of existing shares, however this could not be more wrong. The stocks that were being offered were already existing shares owned by the SFS holding corp. These shares would not have been a dilution, they were simply increasing the public float and taking steps towards becoming a stock more attractive to institutional and long-term investors.
Why I Am Bullish
Knowing that the secondary offering wasn’t meant to be dilutive, I saw this 20% dip as a huge buying opportunity. I bought 100 shares with an average cost of $5.90 between Wednesday and Thursday this week.
In addition to the market overreaction, UWMC showed good Q3 earnings and shows a strong balance sheet. UWMC also pays $0.10 in quarterly dividends giving them a dividend yield of 6.7% on my average cost. With a yield like that, strong financials, ability to make money in a market of rising rates, their efforts to becoming a candidate for institutional attention, I could not pass up on this buying opportunity!
After buying in, on Thursday night, UWMC canceled their secondary offering claiming that the market reaction of a 20% decrease no longer made the offer a logical financial move for them. So they withdrew the offering, essentially canceling the reason for the initial dip, which caused UWMC to bounce back by 17% on Friday.
Those cheap shares IMMEDIATELY paid off! I plan on holding onto these UWMC shares and will continue to add if more opportunities present themselves. The dividend and the future outlook of the company are just too good to pass up on!